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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER: 000-21433
FORRESTER RESEARCH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2797789
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
400 TECHNOLOGY SQUARE
CAMBRIDGE, MASSACHUSETTS 02139
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 613-6000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of November 12, 2003, 22,456,262 shares of the registrant's common stock were
outstanding.
FORRESTER RESEARCH, INC.
INDEX TO FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 3
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2003 and 2002 4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 17
ITEM 4. Controls and Procedures 17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 18
ITEM 2. Changes in Securities and Use of Proceeds 18
ITEM 3. Defaults Upon Senior Securities 18
ITEM 4. Submission of Matters to a Vote of Security-Holders 18
ITEM 5. Other Information 18
ITEM 6. Exhibits and Reports on Form 8-K 18
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FORRESTER RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
SEPTEMBER 30, DECEMBER 31,
2003 2002
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 11,342 $ 11,479
Marketable securities 117,539 183,152
Accounts receivable, net 19,655 17,791
Deferred commissions 4,008 3,524
Prepaid expenses and other current assets 6,962 5,902
----------- ----------
Total current assets 159,506 221,848
Long-term assets:
Property and equipment, net 9,045 10,674
Goodwill, net 55,096 13,244
Intangible assets, net 14,104 760
Deferred income taxes 37,538 21,630
Non-marketable investments and other assets 14,688 10,117
----------- ----------
Total long-term assets 130,471 56,425
----------- ----------
Total assets $ 289,977 $ 278,273
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,757 $ 1,601
Accrued expenses 27,650 20,681
Deferred revenue 51,606 42,123
----------- ----------
Total current liabilities 81,013 64,405
----------- ----------
Stockholders' equity:
Preferred stock, $.01 par value -- --
Authorized-- 500 shares
Issued and outstanding--none
Common stock, $.01 par value
Authorized -- 125,000 shares
Issued-- 24,187 and 24,045 shares as of September 30, 2003
and December 31, 2002, respectively
Outstanding--22,370 and 22,841 shares as of September 30, 2003
and December 31, 2002, respectively 242 240
Additional paid-in capital 170,447 167,935
Retained earnings 66,858 64,754
Treasury stock, at cost--1,817 and 1,204 shares as of
September 30, 2003 and December 31, 2002, respectively (28,881) (20,085)
Accumulated other comprehensive income 298 1,024
----------- ----------
Total stockholders' equity 208,964 213,868
----------- ----------
Total liabilities and stockholders' equity $ 289,977 $ 278,273
=========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
FORRESTER RESEARCH, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
--------- --------- --------- ---------
(UNAUDITED)
Revenues:
Research services $ 23,798 $ 16,984 $ 68,169 $ 54,802
Advisory services and other 8,410 4,954 22,499 18,625
--------- --------- --------- ---------
Total revenues 32,208 21,938 90,668 73,427
--------- --------- --------- ---------
Operating expenses:
Cost of services and fulfillment 12,525 7,540 36,380 25,394
Selling and marketing 10,749 7,094 29,523 23,820
General and administrative 3,927 2,889 10,985 9,590
Depreciation 1,520 1,947 5,052 6,001
Amortization of intangible assets 2,608 82 6,140 246
Integration costs 167 -- 938 --
Reorganization costs 1,230 3,082 1,230 12,170
--------- --------- --------- ---------
Total operating expenses 32,726 22,634 90,248 77,221
--------- --------- --------- ---------
(Loss) income from operations (518) (696) 420 (3,794)
Other income (expense):
Other income, net 787 1,221 3,201 4,262
Impairments of non-marketable investments, net -- (859) (572) (3,593)
--------- --------- --------- ---------
Income (loss) before income tax provision (benefit) 269 (334) 3,049 (3,125)
Income tax provision (benefit) 83 (27) 945 (250)
--------- --------- --------- ---------
Net income (loss) $ 186 $ (307) $ 2,104 $ (2,875)
========= ========= ========= =========
Basic net income (loss) per common share $ 0.01 $ (0.01) $ 0.09 $ (0.12)
========= ========= ========= =========
Diluted net income (loss) per common share $ 0.01 $ (0.01) $ 0.09 $ (0.12)
========= ========= ========= =========
Basic weighted average common shares outstanding 22,462 23,263 22,572 23,254
========= ========= ========= =========
Diluted weighted average common shares outstanding 22,741 23,263 22,793 23,254
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
FORRESTER RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2003 2002
----------- ----------
(UNAUDITED)
Cash flows from operating activities:
Net income (loss) $ 2,104 $ (2,875)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities--
Depreciation 5,052 6,001
Amortization of intangible assets 6,140 246
Impairments of non-marketable investments, net 572 3,593
Realized gain on sales of marketable securities (509) --
Tax benefit from exercises of employee stock options 239 2,179
Deferred income taxes 747 437
Non-cash reorganization costs -- 3,629
Increase in provision for doubtful accounts -- 196
Loss on disposals of property and equipment -- 92
Amortization of premiums on marketable securities 618 868
Changes in assets and liabilities, net of acquisition--
Accounts receivable 9,088 13,541
Deferred commissions (434) 1,642
Prepaid expenses and other current assets 2,401 (1,923)
Accounts payable (1,395) (711)
Accrued expenses (4,714) (2,369)
Deferred revenue (16,914) (20,659)
----------- ----------
Net cash provided by operating activities 2,995 3,887
----------- ----------
Cash flows from investing activities:
Acquisition of Giga Information Group, Inc., net of cash acquired (57,027) --
Purchases of property and equipment (1,122) (1,028)
Purchases of non-marketable investments (3,150) (3,825)
Net (decrease) increase in other assets (1,439) 411
Purchases of marketable securities (164,338) (148,237)
Proceeds from sales and maturities of marketable securities 230,641 157,722
----------- ----------
Net cash provided by investing activities 3,565 5,043
----------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,070 9,293
Acquisition of treasury stock (6,796) (14,830)
Structured stock repurchases, net (1,793) (2,000)
----------- ----------
Net cash used in financing activities (6,519) (7,537)
Effect of exchange rate changes on cash and cash equivalents (178) 73
----------- ----------
Net (decrease) increase in cash and cash equivalents (137) 1,466
Cash and cash equivalents, beginning of period 11,479 17,747
----------- ----------
Cash and cash equivalents, end of period $ 11,342 $ 19,213
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 940 $ 2,382
----------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
5
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC") for
reporting on Form 10-Q. Accordingly, certain information and footnote
disclosures required for complete financial statements are not included herein.
It is recommended that these financial statements be read in conjunction with
the consolidated financial statements and related notes that appear in the
Annual Report of Forrester Research, Inc. ("Forrester") as reported on its Form
10-K for the year ended December 31, 2002. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation of the financial position, results of operations, and
cash flows as of the dates and for the periods presented have been included. The
results of operations for the periods ended September 30, 2003 may not be
indicative of the results that may be expected for the year ended December 31,
2003, or any other period. Certain amounts in the prior period financial
statements have been reclassified to conform to the current year's presentation.
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, requires the measurement of the fair value of stock
options or warrants to be included in the statement of income or disclosed in
the notes to financial statements. Forrester has determined it will continue to
account for stock-based compensation for employees under Accounting Principles
Board Opinion ("APB") No. 25 and elect the disclosure-only alternative under
SFAS No. 123. There is no compensation expense related to option grants
reflected in the accompanying financial statements.
If compensation cost for Forrester's stock option plans had been determined
using the fair value method prescribed in SFAS No. 123, net income (loss) for
the three and nine months ended September 30, 2003 and 2002 would have been
approximately as follows (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(IN THOUSANDS) (IN THOUSANDS)
Net income (loss) as reported $ 186 $ (307) $ 2,104 $ (2,875)
Less: Total stock-based employee compensation expense
determined under fair value based method for all
awards 1,349 1,897 (4,724) 7,297
--------- --------- --------- ---------
Pro-forma net (loss) income $ (1,163) $ (2,204) $ (2,620) $ (10,172)
========= ========= ========= =========
Basic and diluted net income (loss) per share - as reported $ 0.01 $ (0.01) $ 0.09 $ (0.12)
--------- --------- --------- ---------
Basic and diluted net loss per share - pro forma $ (0.05) $ (0.09) $ (0.12) $ (0.44)
========= ========= ========= =========
Income Taxes
Forrester provides for income taxes on an interim basis according to
management's estimate of the effective tax rate expected to be applicable for
the full fiscal year ending December 31.
NOTE 2 - ACQUISITION OF GIGA
In the first quarter of 2003, Forrester acquired Giga Information Group, Inc.
("Giga"), a global technology advisory firm, pursuant to a cash tender offer and
second step merger. The acquisition increased agreement value and the number of
client companies and is expected to reduce operating expenses of the combined
entity through economies of scale. The aggregate purchase price was $62,615,000
in cash which consisted of $60,347,000 for the acquisition of all outstanding
shares of Giga common stock of which $60,247,000 was paid as of September 30,
2003; $1,085,000 of estimated direct acquisition costs of which $1,025,000 was
paid as of September 30, 2003; and $1,183,000 for severance related to 27
employees of Giga terminated as a result of the acquisition of which $1,057,000
was paid as of September 30, 2003. The results of Giga's operations have been
included in Forrester's consolidated financial statements since February 28,
2003. Forrester elected to treat the acquisition of Giga as a stock purchase for
income tax purposes and, accordingly, the goodwill and intangible assets are not
deductible for income tax purposes.
For the nine months ended September 30, 2003, the statement of income reflects a
$1.1 million reclassification that reduced research services revenues and
reduced selling and marketing expenses in order to be consistent with the
presentation for the three months ended September 30, 2003. This
reclassification is related to the finalization of the fair value assessment of
deferred revenue with regard to the acquisition of Giga and had no impact on
operating income.
Integration costs related to the acquisition of Giga are primarily related to
orientation events to familiarize Forrester and Giga employees and data
migration. These are reflected as a separate component of income from
operations.
The following table summarizes the estimated fair values of the Giga assets
acquired and liabilities assumed at the date of acquisition. The final
allocation of the purchase price is expected to be completed during the three
month period ended December 31, 2003.
FEBRUARY 28,
2003
------------
(IN
THOUSANDS)
Assets:
Cash $ 5,302
Accounts receivable 10,458
Prepaid expenses and other current assets 1,393
Property and equipment, net 2,109
Goodwill 41,852
Intangible assets 19,484
Deferred income taxes 16,691
Non-marketable investments and other assets 1,367
6
----------
Total assets $ 98,656
----------
Liabilities:
Accounts payable $ 1,485
Accrued expenses 10,563
Capital lease obligations 208
Deferred revenue 23,785
----------
Total liabilities $ 36,041
----------
Net assets acquired $ 62,615
==========
The acquired intangible assets are being amortized using an accelerated method
according to the expected cash flows to be received from the underlying assets
over their respective lives as follows:
ASSIGNED USEFUL
VALUE LIFE
-------- ------
(IN THOUSANDS)
Amortized intangible assets:
Customer relationships $ 17,070 5 years
Research content 1,844 1 year
Registered trademarks 570 1 year
----------
Subtotal $ 19,484
==========
Amortization expense during the three and nine months ended September 30, 2003
related to the intangible assets acquired from Giga was $2,526,000 and
$5,895,000, respectively.
The following table presents pro forma financial information as if the
acquisition of Giga had been completed as of January 1, 2002.
THREE MONTHS NINE MONTHS ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------------------
2002 2003 2002
------------------- -----------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 36,887 $ 101,242 $ 120,756
Income (loss) from operations $ (2,430) $ (23) $ (9,053)
Net income (loss) $ (1,367) $ 1,322 $ (5,516)
Basic net income (loss) per common share $ (0.06) $ 0.06 $ (0.24)
Diluted net income (loss) per common share $ (0.06) $ 0.06 $ (0.24)
NOTE 3 - INTANGIBLE ASSETS
A summary of Forrester's amortizable intangible assets as of September 30, 2003
is as follows:
GROSS CARRYING ACCUMULATED NET
AMOUNT AMORTIZATION CARRYING AMOUNT
-------------- ------------ ---------------
(IN THOUSANDS)
Amortized intangible assets:
Customer relationships $ 17,970 $ 4,872 $ 13,098
Research content 2,444 1,676 768
Registered trademarks 570 332 238
---------- -------- ----------
Subtotal $ 20,984 $ 6,880 $ 14,104
========== ======== ==========
Estimated amortization expense related to identifiable intangible assets that
will continue to be amortized is as follows:
AMOUNTS
(IN THOUSANDS)
--------------
Remaining three months ending December 31, 2003 $ 2,558
Year ending December 31, 2004 5,541
Year ending December 31, 2005 2,998
Year ending December 31, 2006 1,785
Year ending December 31, 2007 1,075
Year ending December 31, 2008 147
7
----------
Total $ 14,104
==========
NOTE 4 - REORGANIZATIONS
On August 5, 2003, Forrester announced a reduction of its work force by
approximately 30 positions in connection with the integration of Giga. As a
result, Forrester recorded a reorganization charge of approximately $1.2 million
in the three months ended September 30, 2003. Approximately 53% of the
terminated employees had been members of the sales force, while 35% and 12% had
held research and administrative roles, respectively. The charge consisted
primarily of severance and related benefits costs, and other payments for
professional services incurred in connection with the reorganization.
The costs related to the August 5, 2003 reorganization are as follows:
ACCRUED AS OF
TOTAL CASH SEPTEMBER 30,
CHARGE PAYMENTS 2003
------ -------- ----
(IN THOUSANDS)
Workforce reduction $ 1,230 $ 573 $ 657
-------- ------- -------
Total $ 1,230 $ 573 $ 657
======== ======= =======
The accrued costs related to the August 5, 2003 reorganization are expected to
be paid by March 31, 2004.
On July 24, 2002, Forrester announced a reduction of its work force by
approximately 21 positions in response to conditions and demands of the market.
As a result, Forrester recorded a reorganization charge of approximately $2.6
million in the three months ended September 30, 2002.
The costs related to the July 24, 2002 reorganization which were paid during the
nine months ended September 30, 2003 are as follows:
ACCRUED AS OF ACCRUED AS OF
DECEMBER 31, CASH SEPTEMBER 30,
2002 PAYMENTS 2003
---- -------- ----
(IN THOUSANDS)
Workforce reduction $ 51 $ 51 $ --
Facility consolidation and other related costs 661 156 505
------ ------ ------
Total $ 712 $ 207 $ 505
====== ====== ======
The accrued costs related to the July 24, 2002 reorganization are expected to be
paid in the following periods:
ACCRUED AS OF
2003 2004 2005 2006 SEPTEMBER 30, 2003
---- ---- ---- ---- ------------------
(IN THOUSANDS)
Facility consolidation and other related costs $ 53 $ 193 $ 183 $ 76 $ 505
On January 10, 2002, Forrester announced a reduction of its work force by
approximately 126 positions in response to conditions and demands of the market
and a slower economy. As a result, Forrester recorded an initial reorganization
charge of approximately $9.3 million in the three months ended March 31, 2002.
During the three months ended September 30, 2002, Forrester revised the
estimates of the January 10, 2002 reorganization charge to provide for
additional losses for office consolidation costs and the write-off of related
leasehold improvements due to deteriorating real estate market conditions. As a
result, Forrester recorded an additional reorganization charge during the three
months ended September 30, 2002 of approximately $593,000. Forrester also
concluded that approximately $74,000 of the initial reorganization charge
associated with severance was excess, and accordingly, reversed that amount
through reorganization costs in the statement of income during the three months
ended September 30, 2002.
8
Total costs related to the January 10, 2002 reorganization which were paid
during the nine months ended September 30, 2003 are as follows:
ACCRUED ACCRUED
AS OF CASH AS OF
DECEMBER 31,2002 PAYMENTS SEPTEMBER 30, 2003
---------------- -------- ------------------
(IN THOUSANDS)
Workforce reduction $ -- $ -- $ --
Facility consolidation
and other related costs 2,838 1,139 1,699
Depreciable assets -- -- --
------ ------ ------
Total $2,838 $1,139 $1,699
====== ====== ======
The accrued costs related to the January 10, 2002 reorganization are expected to
be paid in the following periods:
ACCRUED AS OF
2003 2004 2005 2006 SEPTEMBER 30, 2003
------ ------ ------ ------ ------------------
(IN THOUSANDS)
Facility consolidation and other
related costs $ 310 $ 746 $ 416 $ 227 $1,699
During the three months ended March 31, 2002, management concluded that
approximately $163,000 of the reorganization charge recorded in July 2001 was
excess, and accordingly, reversed that amount through reorganization costs in
the statement of income during that period.
NOTE 5 - NET INCOME (LOSS) PER COMMON SHARE
Basic and diluted net loss per common share for the three and nine months ended
September 30, 2002 were computed by dividing net loss by the basic weighted
average number of common shares outstanding during the periods. Diluted net
income per common share for the three and nine months ended September 30, 2003
were computed by dividing net income by the diluted weighted average number of
common shares outstanding during the periods. The weighted average number of
common equivalent shares outstanding has been determined in accordance with the
treasury-stock method. Common stock equivalents consist of common stock issuable
on the exercise of outstanding options when dilutive. A reconciliation of basic
to diluted weighted average shares outstanding is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2003 2002 2003 2002
------ ------ ------ ------
(IN THOUSANDS)
Basic weighted average common shares outstanding 22,462 23,263 22,572 23,254
Weighted average common equivalent shares 279 -- 221 --
------ ------ ------ ------
Diluted weighted average shares outstanding 22,741 23,263 22,793 23,254
====== ====== ====== ======
During the three month periods ended September 30, 2003 and 2002, approximately
2,921,000 and 4,828,000 stock options, respectively, were excluded from the
calculation of diluted weighted average shares outstanding as the effect would
have been anti-dilutive.
During the nine month periods ended September 30, 2003 and 2002, approximately
3,145,000 and 2,945,000 stock options, respectively, were excluded from the
calculation of diluted weighted average shares outstanding as the effect would
have been anti-dilutive.
NOTE 6 - COMPREHENSIVE INCOME (LOSS)
The components of total comprehensive income (loss) for the three and nine
months ended September 30, 2003 and 2002 are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- ---------
(IN THOUSANDS)
Unrealized (loss) gain on marketable securities, net of taxes $ (419) $ 723 $ (125) $ 1,112
Cumulative translation adjustment (608) 38 (601) (382)
-------- -------- -------- ---------
Total other comprehensive (loss) income $ (1,027) $ 761 $ (726) $ 730
Reported net income (loss) 186 (307) 2,104 (2,875)
-------- -------- -------- ---------
Total comprehensive (loss) income $ (794) $ 454 $ 1,378 $ (2,145)
======== ======== ======== =========
NOTE 7 - NON-MARKETABLE INVESTMENTS
In June 2000, Forrester committed to invest $20.0 million in two private equity
investment funds over a period of up to five years. During the nine months ended
September 30, 2003 and 2002, Forrester contributed approximately $3.2 million
and $3.8 million to these investment funds, respectively, resulting in total
cumulative contributions of approximately $15.4 million to date. One of these
investments is being accounted for using the cost method and, accordingly, is
valued at cost unless an other than temporary impairment in its value occurs or
the investment is liquidated. The other investment is being accounted for using
the equity method. The carrying value of the investment funds as of September
30, 2003 was approximately $9.3 million. During the three months ended September
30, 2003, Forrester did not record any net impairments to these investments.
During the three months ended September 30, 2002, Forrester recorded net
impairments to these investments of approximately
9
$859,000. During the nine months ended September 30, 2003 and 2002, Forrester
recorded net impairments to these investments of approximately $442,000 and $1.9
million, respectively, which are included in the consolidated statements of
income, resulting in total cumulative net impairments recorded of approximately
$4.2 million as of September 30, 2003. During the three months ended June 30,
2003, one of the private equity investment funds distributed publicly-listed
common stock to Forrester. The disposal of the common stock resulted in a gain
of $424,000 recorded in the consolidated statement of income for the nine months
ended September 30, 2003 as a reduction of impairments of non-marketable
investments. During the three months ended September 30, 2003 and 2002, fund
management charges of approximately $84,000 and $121,000, respectively, were
included in other income (expense) in the consolidated statements of income.
During the nine months ended September 30, 2003 and 2002, fund management
charges of approximately $326,000 and $362,000, respectively, were included in
other income (expense) in the consolidated statement of income, bringing the
total cumulative fund management charges paid by Forrester to approximately $1.5
million. Fund management charges are recorded as a reduction of the investments'
carrying value. Forrester has adopted a cash bonus plan to pay bonuses, after
the return of invested capital, measured by the proceeds of a portion of its
share of net profits from these investments, if any, to certain key employees,
subject to the terms and conditions of the plan. The payment of such bonuses
would result in compensation expense with respect to the amounts so paid.
The timing of the recognition of future gains or losses from these investment
funds is beyond Forrester's control. As a result, it is not possible to predict
when Forrester will recognize such gains or losses, if Forrester will award cash
bonuses based on the net profit from such investments, or when Forrester will
incur compensation expense in connection with the payment of such bonuses. If
the investment funds realize large gains or losses on their investments,
Forrester could experience significant variations in its quarterly results
unrelated to its business operations. These variations could be due to
significant gains or losses or to significant compensation expenses. While gains
may offset compensation expenses in a particular quarter, there can be no
assurance that related gains and compensation expenses will occur in the same
quarters.
As part of the acquisition of Giga discussed in Note 2, Forrester acquired an
equity investment in GigaGroup S.A. GigaGroup S.A. was created in 2000 through
the spin-off of Giga's French subsidiary, and holds an exclusive agreement to
distribute all Giga research and certain services in France, Belgium,
Netherlands, Luxemburg, Switzerland, Italy, Spain, and Portugal. During the
three and nine months ended September 30, 2003, Forrester recognized revenues of
approximately $375,000 and $964,000, respectively, related to this distribution
agreement. In November 2002, GigaGroup S.A. acquired CXP International, a
provider of IT advisory services in France. As a result, Giga owned
approximately 12% of the combined enterprise. The fair value of the equity
investment acquired as a result of the acquisition of Giga was valued at
approximately $1.2 million. This investment is being accounted for using the
cost method and, accordingly, is being valued at cost unless a permanent
impairment in its value occurs or the investment is liquidated.
In July 2000, Forrester invested $1.6 million to purchase preferred shares of
comScore Networks, Inc. ("comScore"), a provider of infrastructure services
which utilizes proprietary technology to accumulate comprehensive information on
consumer buying behavior, resulting in approximately a 1.2% ownership interest.
This investment is being accounted for using the cost method and, accordingly,
is valued at cost unless a permanent impairment in its value occurs or the
investment is liquidated. In September 2001, Forrester determined that its
investment in comScore had been permanently impaired due to an additional round
of financing at a significantly lower valuation. As a result, Forrester recorded
a write-down of $836,000 to impairments of non-marketable investments in the
consolidated statement of income. In June 2002, Forrester determined that its
investment in comScore had been permanently impaired due to an additional round
of financing at a significantly lower valuation. As a result, Forrester recorded
a further write-down of $271,000 to impairments of non-marketable investments in
the statement of income. In June 2003, Forrester determined that its investment
in comScore had been permanently impaired due to an additional round of
financing at a significantly lower valuation. As a result, in the three-month
period ended June 30, 2003 Forrester recorded a further write-down of $130,000
in the consolidated statement of income.
In September 2001, Forrester sold its Internet AdWatch product to Evaliant Media
Resources, LLC ("Evaliant"), a privately held international provider of online
advertising data, in exchange for membership interests in Evaliant representing
approximately an 8% ownership interest. The investment in Evaliant was accounted
for using the cost method and, accordingly, was valued at cost unless an
impairment in its value that is other than temporary occurred or the investment
was liquidated. In March 2002, Forrester determined that its investment had been
impaired. As a result, Forrester recorded a write-down of approximately
$1,464,000, which was included in the consolidated statement of income during
the three months ended March 31, 2002, reducing the carrying value to
approximately $250,000. Substantially all of Evaliant's assets were sold in June
2002 resulting in no gain or loss to Forrester on the transaction.
NOTE 8 - STOCK REPURCHASE
In October 2001, Forrester announced a program authorizing the repurchase of up
to $50 million of its common stock. The shares repurchased may be used, among
other things, in connection with Forrester's employee stock option and stock
purchase plans and for potential acquisitions. During the nine months ended
September 30, 2003, Forrester repurchased approximately 614,000 shares of common
stock at an aggregate cost of approximately $8.8 million. During the nine months
ended September 30, 2002, Forrester repurchased approximately 850,000 shares of
common stock at an aggregate cost of approximately $14.8 million.
During the three months ended September 30, 2003, Forrester entered into a
structured stock repurchase agreement giving it the right to acquire shares of
Forrester common stock in exchange for an up-front net payment of $2.0 million.
The agreement expires in November 2003. Pursuant to the agreement, if
Forrester's stock price is above $16.86 on the expiration date, Forrester will
have the investment of $2.0 million returned with a premium. If Forrester's
stock price is below $16.86 on the expiration date, Forrester will receive
approximately 124,000 shares of Forrester common stock. The $2.0 million
up-front net payment is recorded in stockholder's equity as a reduction of
additional paid-in capital in the accompanying consolidated balance sheet.
During the three months ended June 30, 2003, Forrester entered into a similar
agreement in exchange for an up-front net payment of $2.0 million recorded as a
reduction of additional paid-in-capital. Upon expiration of the agreement in
August 2003, Forrester received approximately $2.1 million of cash which was
recorded as an increase to additional paid-in capital.
During the three months ended March 31, 2003, Forrester entered into a similar
agreement in exchange for an up-front net payment of $2.0 million recorded as a
reduction of additional paid-in-capital. Upon expiration of the agreement in
June 2003, Forrester received approximately $2.1 million of cash which was
recorded as an increase to additional paid-in capital.
10
During the three months ended December 31, 2002, Forrester entered into a
similar agreement in exchange for an up-front net payment of $2.0 million, which
was recorded in stockholders equity as a reduction of additional paid in capital
as of December 31, 2002. Upon expiration of the agreement in February 2003,
Forrester received 144,291 shares of Forrester common stock and reclassified the
up-front net payment from additional paid-in capital to treasury stock.
NOTE 9 - SEGMENT AND ENTERPRISE WIDE REPORTING
As of January 1, 2002, Forrester implemented a structure under which its
operations are managed within the following three operating groups ("Operating
Groups"): (i) North America, (ii) Europe, and (iii) Asia, Middle East, Africa,
and Latin America. All of the Operating Groups generate revenues through sales
of the same research, strategic advisory services, and events offerings. Each of
the Operating Groups is comprised of sales forces responsible for clients
located in such Operating Group's region and research personnel focused
primarily on issues generally more relevant to clients in that region. Because
the three Operating Groups have similar economic characteristics, production
processes, and class of client, provide similar products and services, and use
similar distribution methods, they are aggregated for presentation in
Forrester's financial statements. Accordingly, the financial information
disclosed in the consolidated statements of income for the three and nine months
ended September 30, 2003 and 2002 represent the aggregation of the Operating
Groups.
Net revenues by geographic client location and as a percentage of total revenues
are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(IN THOUSANDS)
United States $ 23,286 $ 16,017 $ 64,930 $ 53,016
United Kingdom 2,722 1,767 7,934 6,244
Europe (excluding United Kingdom) 2,833 1,846 8,208 6,727
Canada 1,727 676 4,519 2,271
Other 1,640 1,632 5,077 5,169
--------- --------- --------- ---------
$ 32,208 $ 21,938 $ 90,668 $ 73,427
========= ========= ========= =========
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- ------
United States 72% 73% 72% 72%
United Kingdom 9 8 9 9
Europe (excluding United Kingdom) 9 8 9 9
Canada 5 3 5 3
Other 5 8 5 7
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force ("EITF") issued EITF No. 00-21,
Revenue Arrangements with Multiple Deliverables. Under EITF 00-21, revenues for
contracts which contain multiple deliverables that qualify for separation are
allocated among the separate units in proportion to their relative fair values.
The provisions of EITF 00-21 are effective for contracts entered into in fiscal
periods beginning after June 15, 2003. Forrester adopted EITF 00-21 during the
period ended September 30, 2003. The adoption of EITF 00-21 did not have a
material impact on Forrester's consolidated financial position or results of
operations.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, Consolidation for Variable Interest Entities, an
Interpretation of ARB No. 51 which requires all variable interest entities
("VIEs") to be consolidated by the primary beneficiary. The primary beneficiary
is the entity that holds the majority of the beneficial interest in the VIE. In
addition, the interpretation expands the disclosure requirements for both
variable interest entities that are consolidated as well as VIEs from which the
entity is the holder of a significant amount of beneficial interests, but not
the majority. FIN 46 is effective for all VIEs created or acquired after January
31, 2003 (of which there were none). For VIEs created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period ending after December 15, 2003. The adoption of this
interpretation is not expected to have a material impact on Forrester's
consolidated financial position or results of operations.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Words such
as "expects," "believes," "anticipates," "intends," "plans," "estimates," or
similar expressions are intended to identify these forward-looking statements.
These statements include, but are not limited to, Forrester's financial and
operating targets for the forth quarter of and full-year 2003, statements about
the potential success of WholeView and other product offerings, the anticipated
cost savings related to the reorganizations and reductions in force in full-year
2003, Forrester's ability to successfully integrate Giga, and the ability of
Forrester to achieve success as the economy improves. These statements are based
on Forrester's current plans and expectations and involve risks and
uncertainties that could cause actual future activities and results of
operations to be materially different from those set forth in the
forward-looking statements. Important factors that could cause actual future
activities and results to differ include, among others, Forrester's ability to
successfully integrate Giga into Forrester's operations, Forrester's ability to
anticipate business and economic conditions, market trends, competition, the
ability to attract and retain professional staff, possible variations in
Forrester's quarterly operating results, risks associated with Forrester's
ability to offer new products and services, the actual amount of cost savings
and the charge related to the reorganization and the reduction in force, and
Forrester's dependence on renewals of its membership-based research services and
on key personnel. This list of factors is not exhaustive. Other risks and
uncertainties are discussed elsewhere in this report and in further detail under
the caption entitled "Risks and Uncertainties" included in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2002 which has been filed with
the SEC. We undertake no obligation to update publicly any forward looking
statements, whether as a result of new information, future events, or otherwise.
Unless the context otherwise requires, references in this Quarterly Report to
"we," "us," and "our" refer to Forrester Research, Inc. and its subsidiaries.
We are a leading independent emerging-technology research firm that conducts
research and analysis on the impact of emerging technologies on business,
consumers, and society. We provide our clients with an integrated perspective on
technology and business, which we call the WholeView. This approach provides
companies with the strategies, data, and product evaluations they need to win
customers, identify new markets, and gain competitive operational advantages.
Our products and services primarily are targeted to benefit the senior
management, business strategists, and marketing and technology professionals at
$1 billion-plus companies who use our prescriptive, executable research to
understand and capitalize on business models and emerging technologies.
In the first quarter of 2003, we acquired Giga Information Group, Inc. ("Giga"),
a global technology advisory firm, pursuant to a cash tender offer and second
step merger. Giga provides objective research, pragmatic advice and personalized
consulting on technology information. Emphasizing close interaction among
analysts and clients, Giga enables companies to make better strategic decisions
that are designed to maximize technology investments and achieve business
results. The results of Giga's operations have been included in our consolidated
financial statements since February 28, 2003.
As a combined entity, we continue to derive revenues from memberships to our
research services, from our advisory services, and from our events and
conferences. We offer contracts for our products and services that are typically
renewable annually and payable in advance. Accordingly, a substantial portion of
our billings are initially recorded as deferred revenue. Research revenues are
recognized ratably over the term of the contract. Accordingly, a substantial
portion of our billings is recorded as deferred revenue. Our advisory services
clients purchase such services to supplement their memberships to our research.
Billings attributable to advisory services are initially recorded as deferred
revenue and recognized as revenue when performed. Event billings are also
initially recorded as deferred revenue and are recognized upon completion of
each event. Consequently, changes in the number and value of client contracts,
both net decreases as well as net increases, impact our revenues and other
results over a period of several months.
Our operating expenses consist of cost of services and fulfillment, selling and
marketing expenses, general and administrative expenses, depreciation and
amortization, amortization of intangible assets, integration costs, and
reorganization costs. Cost of services and fulfillment represents the costs
associated with the production and delivery of our products and services, and it
includes the costs of salaries, bonuses, and related benefits for research
personnel and all associated editorial, travel, and support services. Selling
and marketing expenses include salaries, employee benefits, travel expenses,
promotional costs, sales commissions, and other costs incurred in marketing and
selling our products and services. General and administrative expenses include
the costs of the technology, operations, finance, and strategy groups and our
other administrative functions. Overhead costs are allocated over these
categories according to the number of employees in each group. Integration costs
are related to our acquisition of Giga, and are primarily related to orientation
events and data migration. Reorganization costs consist primarily of severance
and related benefits costs, office consolidation costs, such as contractual
lease commitments for space that was vacated, the write-off of related leasehold
improvements and furniture and fixtures, and other payments for professional
services incurred in connection with our various reorganizations. Reorganization
costs also include additional depreciable assets, such as computer equipment and
software, that were written off in connection with the reorganizations.
We believe that the "agreement value" of contracts to purchase research and
advisory services provides a significant measure of our business volume. We
calculate agreement value as the total revenues recognizable from all research
and advisory service contracts in force at a given time, without regard to how
much revenue has already been recognized. Agreement value increased
approximately 51% to $118.0 million as of September 30, 2003 from $78.4 million
as of September 30, 2002 and from $78.1 million as of December 31, 2002. The
increase in agreement value is primarily attributable to the acquisition of Giga
in February 2003. No clients accounted for more than 2% of agreement value at
September 30, 2003 or September 30, 2002. In past years, a substantial portion
of our client companies renewed expiring contracts. Approximately 62% of our
client companies (including clients acquired from Giga) with memberships
expiring during the twelve months ended September 30, 2003 renewed one or more
memberships for our products and services, compared with 55% of client companies
with memberships expiring during the twelve months ended September 30, 2002.
Renewal rates are not necessarily indicative of the rate of future retention of
our revenue base.
12
On August 5, 2003, in connection with the integration of Giga, Forrester
announced a general workforce reduction. As a result, Forrester reduced its
workforce by approximately 30 positions and recorded a charge of $1.2 million in
the three months ended September 30, 2003. This charge consisted primarily of
severance and related expenses from the workforce reduction.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates, including but
not limited to, those related to our revenue recognition, allowance for doubtful
accounts, non-marketable investments, and goodwill and other intangible assets
and income taxes. Management bases its estimates on historical experience and
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We have identified the following policies as critical to our business operations
and the understanding of our results of operations. This is not a comprehensive
list of all of our accounting policies. In many cases, the accounting treatment
of a particular transaction is specifically dictated by generally accepted
accounting principles, with no need for management's judgment in their
application. There are also areas in which management's judgment in selecting
any available alternative would not produce a materially different result. For
further discussion of the application of these and our other accounting
policies, see Management's Discussion and Analysis of Financial Condition and
Results of Operations and the Notes to Consolidated Financial Statements in our
December 31, 2002 Annual Report on Form 10-K, previously filed with the SEC.
- - REVENUE RECOGNITION. We generally invoice our research services, advisory
services, and other services when orders are received. The contract amount is
recorded as accounts receivable and deferred revenue when the client is
invoiced. Research services are generally recorded as revenue ratably over the
term of the agreement. Advisory services and other services are recognized
during the period in which the services are performed. Furthermore, our revenue
recognition determines the timing of commission expenses that are deferred and
expensed to operations as the related revenue is recognized. We evaluate the
recoverability of deferred commissions at each balance sheet date. As of
September 30, 2003, deferred revenues and deferred commissions totaled $51.6
million and $4.0 million, respectively.
- - ALLOWANCE FOR DOUBTFUL ACCOUNTS. We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our customers to
make contractually obligated payments that totaled approximately $1.2 million as
of September 30, 2003. Management specifically analyzes accounts receivable and
historical bad debts, customer concentrations, current economic trends, and
changes in our customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
- - NON-MARKETABLE INVESTMENTS. We hold minority interests in companies and equity
investment funds that totaled approximately $12.7 million as of September 30,
2003. Our investments are in companies that are not publicly traded, and,
therefore, no established market for these securities exists. We have a policy
in place to review the fair value of our investments on a regular basis to
evaluate the carrying value of the investments in these companies. We record
impairment charges when we believe that an investment has experienced a decline
in value that is other than temporary. We recorded no impairment charges during
the three months ended September 30, 2003. We recorded net impairment charges
that totaled approximately $859,000 during the three months ended September 30,
2002, and $572,000 and $3.6 million during the nine months ended September 30,
2003 and September 30, 2002, respectively. Future adverse changes in market
conditions or poor operating results of underlying investments could result in
losses or an inability to recover the carrying value of the investments that may
not be reflected in an investment's current carrying value, thereby possibly
requiring an impairment charge in the future.
- - GOODWILL. We have goodwill related to our European operations and our
acquisition of Giga that totaled approximately $55.1 million as of September 30,
2003. SFAS No. 142 requires that goodwill and intangible assets with indefinite
lives no longer be amortized but instead be measured for impairment at least
annually or whenever events indicate that there may be an impairment. In order
to determine if an impairment exists, we obtain an independent appraisal which
determines if the carrying amount of the reporting unit exceeds the fair value.
The estimates of the reporting unit's fair value are based on market conditions
and operational performance. We have selected November 30th as the date of
performing the annual goodwill impairment test. As of September 30, 2003, we
believe that the carrying value of our goodwill is not impaired. Future events
could cause us to conclude that impairment indicators exist and that goodwill
associated with our acquired businesses are impaired. Any resulting impairment
loss could have a material adverse impact on our financial condition and results
of operations.
- - INCOME TAXES. We have deferred tax assets related to temporary differences
between the financial statement and tax bases of assets and liabilities as well
as operating loss carryforwards (primarily from stock option exercises and the
acquisition of Giga) that totaled approximately $37.5 million as of September
30, 2003. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible and the
carryforwards expire. Although realization is not assured, based upon the level
of our historical taxable income and projections for our future taxable income
over the periods during which the deferred tax assets are deductible and the
carryforwards expire, management believes it is more likely than not that we
will realize the benefits of these deductible differences. The amount of the
deferred tax asset considered realizable, however, could be reduced if estimates
of future taxable income during the carry-forward periods are reduced.
13
RESULTS OF OPERATIONS
The following table sets forth selected financial data as a percentage of total
revenues for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2003 2002 2003 2002
---- ---- ---- ----
Research services 74% 77% 75% 75%
Advisory services and other 26 23 25 25
---- ---- ---- ----
Total revenues 100 100 100 100
Cost of services and fulfillment 39 35 40 35
Selling and marketing 33 32 33 32
General and administrative 12 13 12 13
Depreciation 5 9 6 8
Amortization of intangible assets 8 -- 7 --
Integration costs -- -- 1 --
Reorganization costs 4 14 1 17
---- ---- ---- ----
(Loss) income from operations (1) (3) -- (5)
Other income, net 2 6 4 6
Impairments of non-marketable investments -- (4) (1) (5)
---- ---- ---- ----
Income (loss) before income tax provision (benefit) 1 (1) 3 (4)
Income tax provision (benefit) -- -- 1 --
---- ---- ---- ----
Net income (loss) 1% (1)% 2% (4)%
==== ==== ==== ====
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
REVENUES. Total revenues increased 47% to $32.2 million in the three months
ended September 30, 2003 from $21.9 million in the three months ended September
30, 2002. The acquisition of Giga closed on February 28, 2003 and, as such,
Giga's operations have been included in the consolidated financial statements
since February 28, 2003.
Revenues from research services increased 40% to $23.8 million in the three
months ended September 30, 2003 from $17.0 million in the three months ended
September 30, 2002 and comprised 74% and 77% of total revenues during the three
months ended September 30, 2003 and 2002, respectively. Increases in total
revenues and revenues from research services were primarily attributable to
increases in agreement value and client companies as a result of the Giga
acquisition. No single client company accounted for more than 2% of revenues
during the three months ended September 30, 2003 or 2002.
Advisory services and other revenues increased 70% to $8.4 million in the three
months ended September 30, 2003 from $5.0 million in the three months ended
September 30, 2002. During the three months ended September 30, 2003, we held
one Forrester Forum as compared to two Forrester Summits held during the three
months ended September 30, 2002. The increase in advisory services and other
revenues is primarily attributable to increases in the number of clients, to
1,763 at September 30, 2003 from 1,165 at September 30, 2002, and research
employees delivering advisory services to 193 employees at September 30, 2003
from 127 employees at September 30, 2002. The increase in clients and headcount
in our research organization is primarily attributable to the acquisition of
Giga.
Revenues attributable to customers outside the United States increased 51% to
$8.9 million in the three months ended September 30, 2003 from $5.9 million in
the three months ended September 30, 2002. Revenues attributable to customers
outside the United States increased as a percentage of total revenues to 28%
during the three months ended September 30, 2003 from 27% during the three
months ended September 30, 2002. The increase in international revenues in
dollars is primarily attributable to the acquisition of Giga. The increase in
international revenues as a percentage of total revenues is primarily
attributable to an increase in the delivery of advisory services in Europe. We
invoice our international clients in U.S. dollars, British pounds sterling, and
the euro. The effect of changes in currency exchange rates has historically not
had a significant impact on our results of operations.
COST OF SERVICES AND FULFILLMENT. Cost of services and fulfillment increased as
a percentage of total revenues to 39% in the three months ended September 30,
2003 from 35% in the three months ended September 30, 2002. These expenses
increased 66% to $12.5 million in the three months ended September 30, 2003 from
$7.5 million in the three months ended September 30, 2002. The increases in
expenses and expenses as a percentage of revenues were primarily attributable to
greater compensation costs, as headcount in our research organization increased
to 193 employees at September 30, 2003 from 127 employees at September 30, 2002.
The increased headcount in our research organization is primarily attributable
to the acquisition of Giga, which provided for an additional 91 research
personnel at the time of acquisition.
SELLING AND MARKETING. Selling and marketing expenses increased as a percentage
of total revenues to 33% in the three months ended September 30, 2003 from 32%
in the three months ended September 30, 2002. These expenses increased 52% to
$10.7 million in the three months ended September 30, 2003 from $7.1 million in
the three months ended September 30, 2002. The increases in expenses and
expenses as a percentage of total revenues were primarily attributable to
greater compensation costs, as headcount in our sales organization increased to
189 employees at September 30, 2003 from 117 employees at September 30, 2002.
The increased headcount in our sales organization is primarily attributable to
the acquisition of Giga, which provided for an additional 82 sales personnel at
the time of acquisition.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased as a
percentage of total revenues to 12% in the three months ended September 30, 2003
from 13% in the three months ended September 30, 2002. These expenses increased
36% to $3.9 million in the three months ended September 30, 2003 from $2.9
million in the
14
three months ended September 30, 2002. The increase in expenses was primarily
due to greater compensation costs and professional fees as a result of the Giga
acquisition. The decrease in expenses as a percentage of revenues is primarily
attributable to an increased revenue base as a result of the acquisition of
Giga.
DEPRECIATION. Depreciation expense decreased 22% to $1.5 million in the three
months ended September 30, 2003 from $1.9 million in the three months ended
September 30, 2002. The decrease in these expenses was principally due to the
write-off of certain depreciable assets in connection with the workforce
reorganizations in July 2002 partially offset by additional depreciation expense
from fixed assets acquired as part of the acquisition of Giga and other capital
expenditures during the nine months ended September 30, 2003.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets increased
to $2.6 million in the three months ended September 30, 2003 from $82,000 in the
three months ended September 30, 2002. This increase in amortization expense is
attributable to the amortization of intangible assets acquired in connection
with the acquisition of Giga.
INTEGRATION COSTS. We incurred integration costs of $167,000 during the three
months ended September 30, 2003. These integration costs are related to our
acquisition of Giga, and are primarily related to orientation events to
familiarize Forrester and Giga employees and data migration.
REORGANIZATION COSTS. Reorganization costs decreased to $1.2 million in the
three months ended September 30, 2003 from $3.1 million in the three months
ended September 30, 2002. During the three months ended September 30, 2003,
these costs related to severance and related benefits costs in connection with
the termination of approximately 30 positions. During the three months ended
September 30, 2002, these costs related to facility consolidation costs, and
severance and related benefits costs in connection with the termination of
approximately 21 positions.
OTHER INCOME, NET. Other income, consisting primarily of interest income,
decreased 36% to $787,000 during the three months ended September 30, 2003 from
$1.2 million the three months ended September 30, 2002. The decrease is
primarily attributable to declines in interest income resulting from lower cash
and investment balances available for investment as a result of the cash paid
for the acquisition of Giga, coupled with lower returns on invested capital.
IMPAIRMENTS OF NON-MARKETABLE INVESTMENTS. Impairments of non-marketable
investments resulted in net charges of $859,000 during the three months ended
September 30, 2002.
PROVISION FOR INCOME TAXES. During the three months ended September 30, 2003, we
recorded an income tax provision of $83,000 reflecting an effective tax rate of
31%. During the three months ended September 30, 2002, we recorded a tax benefit
of $27,000, which reflected an effective tax rate of 8%. The increase in our
effective tax rate for fiscal year 2003 resulted primarily from our tax-exempt
investment income comprising a smaller percentage of our estimated total pre-tax
income in 2003 as compared to 2002.
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
REVENUES. Total revenues increased 23% to $90.7 million in the nine months ended
September 30, 2003 from $73.4 million in the nine months ended September 30,
2002. The acquisition of Giga closed on February 28, 2003 and, as such, Giga's
operations have been included in the consolidated financial statements since
February 28, 2003.
Revenues from research services increased 24% to $68.2 million in the nine
months ended September 30, 2003 from $54.8 million in the nine months ended
September 30, 2002 and comprised 75% of total revenues during each period.
Increases in total revenues and revenues from research services were primarily
attributable to increases in agreement value and client companies as a result of
the Giga acquisition compared to the same nine-month period in 2002. No single
client company accounted for more than 2% of revenues during the nine months
ended September 30, 2003 or 2002.
Advisory services and other revenues increased 21% to $22.5 million in the nine
months ended September 30, 2003 from $18.6 million in the nine months ended
September 30, 2002. During the nine months ended September 30, 2003, we held
four Forrester Forums, one Forrester Summit and four Giga events as compared to
three Forrester Forums and six Forrester Summits held during the nine months
ended September 30, 2002. The increase in advisory services and other revenues
is primarily attributable to increases in the number of clients, to 1,763 at
September 30, 2003 from 1,165 at September 30, 2002, and research employees
delivering advisory services to 193 employees at September 30, 2003 from 127
employees at September 30, 2002. The increase in clients and headcount in our
research organization is primarily attributable to the acquisition of Giga.
Revenues attributable to customers outside the United States increased 26% to
$25.7 million in the nine months ended September 30, 2003 from $20.4 million in
the nine months ended September 30, 2002. Revenues attributable to customers
outside the United States remained constant as a percentage of total revenues at
28% during the nine months ended September 30, 2003 and 2002. The increase in
international revenues in dollars is primarily attributable to the acquisition
of Giga.
COST OF SERVICES AND FULFILLMENT. Cost of services and fulfillment increased as
a percentage of total revenues to 40% in the nine months ended September 30,
2003 from 35% in the nine months ended September 30, 2002. These expenses
increased 43% to $36.4 million in the nine months ended September 30, 2003 from
$25.4 million in the nine months ended September 30, 2002. The increases in
expenses and expenses as a percentage of revenues were primarily attributable to
greater compensation costs, as headcount in our research organization increased
to 193 employees at September 30, 2003 from 127 employees at September 30, 2002.
The increased headcount in our research organization is primarily attributable
to the acquisition of Giga, which provided for an additional 91 research
personnel at the time of acquisition.
SELLING AND MARKETING. Selling and marketing expenses increased as a percentage
of total revenues to 33% in the nine months ended September 30, 2003 from 32% in
the nine months ended September 30, 2002. These expenses increased 24% to $29.5
million in the nine months ended September 30, 2003 from $23.8 million in the
nine months ended September 30, 2002. The increase in expenses and expenses as a
percentage of total revenues was primarily attributable to greater compensation
costs, as headcount in our sales organization increased to 189 employees at
September 30, 2003 from 117 employees at September 30, 2002. The increased
headcount in our sales organization is primarily attributable to the acquisition
of Giga, which provided for an additional 82 sales personnel at the time of
acquisition.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased as a
percentage of total revenues to 12% in the nine months ended September 30, 2003
from 13% in the nine months ended September 30, 2002. These expenses increased
15% to $11.0 million in the nine months ended September 30, 2003 from $9.6
million in the nine months ended September 30, 2002. The increase in expenses
was primarily due to greater compensation costs and professional fees as a
result of the Giga acquisition. The decrease in expenses as a percentage of
revenues is primarily attributable to an increased revenue base as a result of
the acquisition of Giga.
DEPRECIATION. Depreciation expense decreased 16% to $5.1 million in the nine
months ended September 30, 2003 from $6.0 million in the nine months ended
September 30, 2002. The decrease in these expenses was principally due to the
write-off of certain depreciable assets in connection with the workforce
reorganizations in July 2002 partially offset by additional depreciation expense
from fixed assets acquired as part of the acquisition of Giga and other capital
expenditures during the nine months ended September 30, 2003.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets increased
to $6.1 million in the nine months ended September 30, 2003 from $246,000 in the
nine months ended September 30, 2002. This increase in amortization expense is a
result of the amortization of intangible assets acquired in connection with the
acquisition of Giga.
INTEGRATION COSTS. We incurred integration costs of $938,000 during the nine
months ended September 30, 2003. These integration costs of $938,000 are related
to our acquisition of Giga, and are primarily related to orientation events to
familiarize Forrester and Giga employees and data migration.
REORGANIZATION COSTS. Reorganization costs decreased to $1.2 million in the nine
months ended September 30, 2003 from $12.2 million in the nine months ended
September 30, 2002. During the nine months ended September 30, 2003, these
costs related to severance and related benefits costs in connection with the
termination of approximately 30 positions. During the nine months ended
September 30, 2002, these costs related to facility consolidation costs,
severance and related benefits costs in connection with the termination of
approximately 147 positions, and losses incurred in the disposal of certain
depreciable assets.
15
OTHER INCOME, NET. Other income, consisting primarily of interest income,
decreased 25% to $3.2 million during the nine months ended September 30, 2003
from $4.3 million during the nine months ended September 30, 2002. The decrease
is primarily due to declines in interest income resulting from lower cash and
investment balances available for investment as a result of the cash paid for
the acquisition of Giga, coupled with lower returns on invested capital. Other
income for the nine months ended September 30, 2003 includes realized gains on
the sales of marketable securities of $509,000 compared to minimal gains on the
sales of marketable securities during the nine months ended September 30, 2002.
IMPAIRMENTS OF NON-MARKETABLE INVESTMENTS. Impairments of non-marketable
investments resulted in net charges of $572,000 during the nine months ended
September 30, 2003 compared to $3.6 million during the nine months ended
September 30, 2002.
PROVISION FOR INCOME TAXES. During the nine months ended September 30, 2003, we
recorded an income tax provision of $945,000 reflecting an effective tax rate of
31%. During the nine months ended September 30, 2002, we recorded a tax benefit
of $250,000, which reflected an effective tax rate of 8%. The increase in our
effective tax rate for fiscal year 2003 resulted primarily from our tax-exempt
investment income comprising a smaller percentage of our estimated total pre-tax
income in 2003 as compared to 2002.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through funds generated from
operations. Memberships for research services, which constituted approximately
75% of our revenues during the nine months ended September 30, 2003, are
annually renewable and are generally payable in advance. We generated cash from
operating activities of $3.0 million and $3.9 million during the nine months
ended September 30, 2003 and 2002, respectively.
During the nine months ended September 30, 2003, we generated $3.6 million of
cash from investing activities, consisting primarily of $66.3 million received
from net sales of marketable securities, offset by $57.0 million, net of cash
acquired, for the purchase of Giga, $3.2 million for net purchases of
non-marketable investments and $1.1 million for purchases of property and
equipment. We regularly invest excess funds in short- and intermediate-term
interest-bearing obligations of investment grade.
During the nine months ended September 30, 2003, we used $6.5 million of cash in
financing activities, consisting of $6.8 million for repurchases of our common
stock and $1.8 million for the net investment in structured stock repurchase
programs, offset by $2.1 million in proceeds from the exercise of employee stock
options and issuance of common stock under our employee stock purchase plan.
In the first quarter of 2003, Forrester acquired Giga, a global technology
advisory firm, pursuant to a cash tender offer and second step merger. The
acquisition increased agreement value and the number of client companies and has
reduced the operating expenses of the combined entity through economies of
scale. The aggregate purchase price was $62,615,000 in cash which consisted of
$60,347,000 for the acquisition of all outstanding shares of Giga common stock
of which $60,247,000 was paid as of September 30, 2003; $1,085,000 of estimated
direct acquisition costs of which $1,025,000 was paid as of September 30, 2003;
and $1,183,000 for severance related to 27 employees of Giga terminated as a
result of the acquisition of which $1,057,000 was paid as of September 30, 2003.
The remaining payments are expected to be completed by March 31, 2004.
As of September 30, 2003, we had cash and cash equivalents of $11.3 million and
marketable securities of $117.5 million. We do not have a line of credit and do
not anticipate the need for one in the foreseeable future. We plan to continue
to introduce new products and services and expect to make minimal investments in
our infrastructure during the next 12 months. We believe that our current cash
balance, marketable securities, and cash flows from operations will satisfy
working capital, financing activities, and capital expenditure requirements for
at least the next two years.
As of September 30, 2003, in connection with our stock repurchase program we had
repurchased 1.8 million shares of common stock at an aggregate cost of
approximately $28.9 million.
During the three months ended September 30, 2003, we entered into a structured
stock repurchase agreement giving us the right to acquire shares of our common
stock in exchange for an up-front net payment of $2.0 million. This agreement
expires in November 2003. Pursuant to the agreement, if our stock price is above
$16.86 on the expiration date, we will have the investment of $2.0 million
returned with a premium. If our stock price is below $16.86 on the expiration
date, we will receive approximately 124,000 shares of our common stock. The $2.0
million up-front net payment is recorded in stockholder's equity as a reduction
of additional paid-in capital in the accompanying consolidated balance sheet.
During each of the three month periods ended March 31, 2003 and June 30, 2003,
we entered into similar agreements in exchange for up-front net payments of
$2.0 million. Upon expiration of each agreement, we received approximately $2.1
million of cash.
In June 2000, we committed to invest $20.0 million in two private equity
investment funds over a period of up to five years. We have adopted a cash bonus
plan to pay bonuses, after the return of invested capital, measured by the
proceeds of a portion of the share of net profits from these investments, if
any, to certain key employees, subject to the terms and conditions of the plan.
The payment of such bonuses would result in compensation expense with respect to
the amounts so paid. As of September 30, 2003, we had contributed approximately
$15.4 million to the funds. The timing and amount of future contributions are
entirely within the discretion of the investment funds.
16
As of September 30, 2003, we had future contractual obligations as follows*:
FUTURE PAYMENTS DUE BY YEAR
---------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL 2003 2004 2005 2006 2007 THEREAFTER
- ----------------------- -------- -------- --------- -------- -------- ------- ----------
(IN THOUSANDS)
Operating leases $ 40,527 $ 2.858 $ 11,240 $ 10,809 $ 7,780 $ 3,088 $ 4,752
======== ======== ========= ======== ======== ======= =======
- ------------
* The above table does not include the remaining $4.6 million of capital
commitments to the private equity funds described above due to the
uncertainty in timing of capital calls made by such funds to pay this
remaining capital commitment. The above table also does not include future
minimum rentals to be received under subleases of $4.3 million.
We do not maintain any off-balance sheet financing arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to market risk
related to changes in interest rates and foreign currency exchange rates. We do
not use derivative financial instruments for speculative or trading purposes.
INTEREST RATE SENSITIVITY. We maintain an investment portfolio consisting mainly
of corporate, federal agency, and state and municipal obligations with a
weighted-average maturity of approximately 15 months. These available-for-sale
securities are subject to interest rate risk and will fall in value if market
interest rates increase. We have the ability to hold our fixed income
investments until maturity. Therefore, we would not expect our operating results
or cash flows to be affected to any significant degree by a sudden change in
market interest rates on our securities portfolio. The following table provides
information about our investment portfolio. For investment securities, the table
presents principal cash flows and related weighted-average interest rates by
expected maturity dates.
Principal amounts by expected maturity in U.S. dollars are as follows:
FAIR VALUE
AT SEPTEMBER 30,
2003 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
----------- ---------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
Cash equivalents $ 967 $ 967 $ -- $ -- $ -- $ --
Weighted average interest rate 1.13% 1.13% -- -- -- --
Investments $ 117,539 $ 53,701 $ 11,710 $14,269 $ 18,959 $ 18,900
Weighted average interest rate 2.89% 1.75% 3.35% 3.80% 4.08% 4.00%
Total portfolio $ 118,506 $ 54,668 $ 11,710 $14,269 $ 18,959 $ 18,900
Weighted average interest rate 2.88% 1.74% 3.35% 3.80% 4.08% 4.00%
FOREIGN CURRENCY EXCHANGE. On a global level, we face exposure to movements in
foreign currency exchange rates. This exposure may change over time as business
practices evolve and could have a material adverse impact on our financial
results. Historically, our primary exposure has been related to non-U.S.
dollar-denominated operating expenses in Canada and Asia, where we sell
primarily in U.S. dollars. The introduction of the Euro as a common currency for
members of the European Monetary Union has not, to date, had a significant
impact on our financial position or results of operations. To date, we have not
entered into any hedging agreements. However, we are prepared to hedge against
fluctuations that the Euro, or other foreign currencies, will have on foreign
exchange exposure if this exposure becomes material. As of September 30, 2003,
the total assets related to non-US dollar denominated currencies that are
subject to foreign currency exchange risk was approximately $13.3 million.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our management, with the
participation of our principal executive officer and principal financial
officer, has evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the
period covered by this Quarterly Report on Form 10-Q. Based on such evaluation,
our principal executive officer and principal financial officer have concluded
that as of such date, our disclosure controls and procedures were designed to
ensure that information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in applicable SEC rules and forms and were
effective.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There was no change in our
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) that occurred during the period covered by
this Quarterly Report on Form 10-Q that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Forrester is not currently a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of the Chief Executive Officer pursuant to Section 13a-15 of
the Securities Exchange Act of 1934.
31.2 Certification of the Chief Financial Officer pursuant to Section 13a-15 of
the Securities Exchange Act of 1934.
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350.
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350.
(b) Reports on Form 8-K
Forrester filed a Current Report on Form 8-K on August 5, 2003 disclosing under
Item 12 its second quarter press release dated August 5, 2003.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FORRESTER RESEARCH, INC.
By: /s/ George F. Colony
-----------------------------------
George F. Colony
Chairman of the Board of Directors
and Chief Executive Officer (principal
executive officer)
Date: November 14, 2003
By: /s/ Warren Hadley
-----------------------------------
Warren Hadley
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
Date: November 14, 2003
19
Exhibit Index
EXHIBIT NO. DOCUMENT
- ----------- --------
31.1 Certification of the Chief Executive Officer pursuant to Section
13a-15 of the Securities Exchange Act of 1934.
31.2 Certification of the Chief Financial Officer pursuant to Section
13a-15 of the Securities Exchange Act of 1934.
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
1350.
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
1350.
20